May 6, 2020 | Eating Risk

Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics.
Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Over 700,000 homeowners have pleaded for mortgage relief. What does this tell us?

First (duh) these folks can’t pay, don’t want to or need the cash to finance food, Netflix and N95s. In short, they own real estate they could only afford when a regular income was flowing. No savings, no reserves, lots of stress and debt.

It’s what you’d expect when the jobless rate explodes from 5% to 20% in a month, and after ten years of unbuckled house lust. Having all your net worth in one asset at one address on one street in one town doesn’t look so genius anymore.

Beyond the personal grief, there are systemic wobbles.

The federal agency standing behind all this mortgage debt – CMHC – has been saying and publishing some worrying things. Since the agency is funded by tax dollars, we should pay attention. (If there are any of them left.) For example, on Tuesday this was buried in the corp’s annual report:

“Increases in insurance claims losses may occur, however we are currently unable to estimate the potential impact on our financial results or condition. In the event our capital position may be impacted, under the Capital and Dividend Policy Framework for Financial Crown Corporations, the Government would stand prepared to inject capital into CMHC should additional capital be needed to deliver on our public policy mandate.”

Whoa. Did the guys insuring $600 billion in residential mortgages just say they might need a federal bail-out? After just buying $150 billion in mortgages from the banks amid the pandemic emergency?

Sure looks like it. Exploding unemployment, the certainty that reduced incomes will last for months (or years), historic levels of household debt, a collapsed real estate market and 10-15% of all owners who can’t pay their monthlies has the siren going off in Ottawa. Clearly CMHC is telling the government defaults and loan losses may dot the horizon.

Already the agency has suspended its regular dividend payment to the federal government in order to preserve cash, and issued this statement: “As a key stabilizing component of the Canadian financial system, we will be substantially increasing our appetite for risk as we and other institutions absorb the impact of these events.”

Hmm. More risk. Sounds a tad ominous. Now add in what CMHC boss Evan Siddall and his colleagues said yesterday – that real estate markets will not bounce back this summer. Or autumn. Or next Spring. Instead: “The best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

That’s two-and-a-half years from now – the “best case” scenario, which presumably means Covid is defeated, we have a vaxxed herd, have managed to turn the economy back on, restored personal incomes, reflated consumer confidence and revived the housing market. As you can see, lots of assumptions there.

But, as mortgage broker and blogger Rob McLister suggests, what if this doesn’t happen?

What if people stop believing in pent-up housing demand? When market psychology sours, more buyers step aside until the coast is clear. And the coast isn’t clear if people fear an avalanche of supply (property listings) post-lock-down. “Demand will be reduced by a weak labour market and weaker investment activity,” writes CIBC. “Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units.”

Could these economic conditions (including troubles at CMHC) stop lenders from lending, preventing buyers from buying, causing prices to cascade lower as sellers grow more desperate? Some people think that’s already started to happen in the commercial real estate space.

Banks are freezing financing for smaller rental properties, thanks to virus-inspired worries over owners’ ability to carry the debt if tenants vanish, lose income or go broke. As one source put it: “If you’re a landlord, and looking to refinance, you can’t get that. So you’re probably going to have to sell. But they’re also limiting new owners who might want to buy that space.” As Reuters reported this week, this is driving some borrowers into the arms of the sub-prime lenders and their sky-high desperado lending rates.

Well, there ya go.

It’s a safe bet mortgage deferrals plus the CERB will be extended now, kicking the crisis down the road for a while longer. Key players – the banks, the feds, the housing agency – all pray enough jobs, income and confidence return to keep this baby from blowing. But it’s lookin’ shonky.